The Problem with Outsourcing

One of the biggest conversations surrounding American manufacturing these days is reshoring; companies of all sizes are bringing business and jobs back to American soil. It’s welcome news for the industry.

As some companies still make the decision to outsource—and as many of us focus on the reshoring trend—what many people are not talking about is whyoutsourcing is such a bad decision, not just for the country, but for those individual companies.

Outsourcing is complex and often fraught with problems. The actual process of moving manufacturing overseas, and then making sure it is being done correctly and efficiently, is even more complicated than it sounds.

Why Outsource?

When outsourcing started to become the norm, it seemed like a no brainer: move production overseas, where labor and parts are cheaper. According to this article, in 2001, American manufacturers “shelled out $7.8 billion on outsourcing.” They thought the initial costs would be made up for over a short period of time. The same article points to Hewlett Packard, who contracted out most of its manufacturing.

The Reality

What Hewlett Packard, and so many companies like them learned, was that “cost savings are not automatic.” In reality, these manufacturers found they either didn’t have the financial resources to outsource as effectively as they had hoped, couldn’t manage the overseas suppliers as well as they needed to, or lost control of the final product outcome—or all three.

Within those scenarios, many other problems can occur. The subcontractors might not have the experience to produce the products they are hired to make, and can’t keep up with demand. More money is spent trying to correct the problem, eliminating projected cost savings. Perhaps the subcontractor’s inexperience leads to serious quality issues, which leads to more money being spent to correct it or test the products, or worse, safety is jeopardized as a result. Suddenly customers lose faith in the products and the company, and turn to competitors, whose quality is unchanged.

When all of these problems occur, the manufacturer might consider bringing production back home; however, millions of dollars have been spent to send production overseas, and equipment has been sold off. What then?

What many businesses have learned the hard way is that outsourcing “changes the business model and introduces many challenges.”* This is precisely why so many multibillion dollar companies are bringing business back home. It’s not just good for American morale and for our economy—it’s simply a better business model. Think of it this way: if your company is your baby, are you going to trust a stranger who’s never watched children before to take care of your child the way you would?